MPC meet: Economists expect RBI to begin rate-hiking cycle

Economists expect the RBI to begin raising interest rates at its October MPC meeting, bringing forward forecasts from December. Higher crude prices, broadening inflation, rising global bond yields and geopolitical risks are strengthening the case for a 25-basis-point hike

New Delhi: As the Reserve Bank of India (RBI) gears up for its monetary policy committee (MPC) meeting next week, economists now expect the Central Bank to begin a rate-hiking cycle, bringing forward their earlier call for a December hike.

A 25 bps hike in October, rather than December as previously forecast, is possible amid higher energy prices, food inflation and wider price pressures which strengthen the case for tighter policy, according to Bank of America (BofA).

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“After almost two years of monetary accommodation, the RBI appears set to take early steps to start withdrawing the policy support in October MPC. As such, we now believe that the RBI will go ahead with a rate hike of 25bp in October MPC,” said BofA. The balance of risks has tilted decisively towards a 25-bps rate hike by the RBI at this juncture, as a combination of broadening inflationary pressures, worsening global macros, evolving liquidity conditions and a renewed global repricing of risks is making the case for pre-emptive action stronger, SBI Research said in its report.

The RBI’s Monetary Policy Committee (MPC) is scheduled to meet from October 5-7, to decide on the benchmark repo rate. The SBI report said that with geopolitical tensions, crude-price risks and global repricing of risks, “it would be prudent for us to rather act pre-emptively than being behind the curve”.

Inflation is becoming increasingly broad-based. CPI inflation rose to 4.82 per cent in August from 4.45 per cent in July. Strong El Nino conditions and below-normal October rainfall could pose further risks to Rabi output.

Rising crude oil prices, inflation and higher bond yields globally has narrowed Reserve Bank of India’s room to hold rates unchanged. Another report from BNP Paribas India said India’s macro‑outlook has weakened in recent weeks as Brent crude rose above $100 per barrel and US 10‑year Treasury yields climbed toward 5 per cent.

The RBI is likely to limit its interest rate increases to 25-50 basis points in the current cycle with markets pricing in a more aggressive tightening path than warranted, according to analysts at global brokerage Nomura. They assigned an 80 per cent probability to a limited recalibration cycle rather than a broader tightening cycle involving more than 75 basis points of rate hikes.